Contrarian Google launches investment fund

As expected, Google launched Google Ventures on Monday, following other Silicon Valley firms with a division to invest in promising start-ups.

"This is Google's effort to take advantage of our resources to support innovation and encourage promising new technology companies," said Google Ventures managing partners Rich Miner and Bill Maris in a blog post announcing the effort. "By borrowing the best practices of top-tier, financially focused venture capital firms and bringing to bear Google's unique technical expertise and brand, we think we can find young companies with truly awesome potential and encourage their development into successful businesses."

So where will Google direct its attention?

"We'll be focusing on early stage investments across a diverse range of industries, including consumer Internet, software, clean-tech, bio-tech, health care and, no doubt, other areas we haven't thought of yet," the partners said.

Earlier Monday, the Wall Street Journal reported Google will fund the effort with $100 million in its first year.

Last week, Google announced an investment in Pixazza, an e-commerce company that hopes enlist profit-minded individuals to label photos on with sales-lead tags so they, Web site publishers, and Pixazza can generate revenue from online imagery. At the time, Google said it wasn't yet ready to discuss Google Ventures.

But wait--isn't there a recession? Venture capital firms have tightened the purse strings, with fourth-quarter investments dropping 71 percent from $11.7 billion in 2007 to $3.4 billion in 2008, according to the National Venture Capital Association.

Well, Google has said it's confident of its cash position and ability to weather the storm. Also, a down economy is a good time to get better terms out of start-ups and to take on traditional venture capitalists who are leery of new investments during a time when it's hard to extract funds from existing ones that no longer look so hot for acquisition or an initial public offering.

"Economically, times are tough, but great ideas come when they will. If anything, we think the current downturn is an ideal time to invest in nascent companies that have the chance to be the 'next big thing,' and we'll be working hard to find them," the partners said.

Venture firms are relatively common among bigger Silicon Valley companies. During the fast-rising valuations during the dot-com bubble of the late 1990s, companies often found their investments doing better than their ordinary business. But the appetite for risk soured along with the economy.

[atish505]

Invest $ 100 million in 20 to 30 startups in year 1, make $ 1 billion by turning these around in 3 to 4 years. Very good ROI for Google Ventures.

[Kimsh]

Nice, Google plans to capitalize on a time when start ups have no where else to turn to get bargains and lock them into restrictive deals. Of course they could have used the cash to retain some of their loyal employees instead...? "Do no evil" hey, well I guess it is just good business isn't it?

[Shankland]

If you're running a start-up, I don't think there's anything requiring you to take an investment from Google.

Google used quite a pile of cash to retain their employees--far more than $100 million--by repricing worthless stock options. Investors had some indigestion over that.

It is interesting to watch the Do No Evil motto encounter the real world, though. There's a lot of moral ambiguity out there.